Sanghi Industries Limited (SANGHIIND.BO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 and H1 FY '22 Conference call of Sanghi Industries Limited hosted by PhillipCapital (India) Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vaibhav Agarwal from PhillipCapital (India) Private Limited. Thank you, and over to you, sir.

Thank you, Faizan. Good afternoon, everyone. On behalf of PhillipCapital India Private Limited, we welcome you to the Q2 FY '22 and H1 FY '22 call of Sanghi Industries Limited. On the call, we have with us Mr. Alok Sanghi and Ms. Bina Engineer, Whole-Time Director of the company. I would like to mention on behalf of Sanghi Industries Limited and its management that certain statements that may be made or discussed on the conference call may be forward-looking statements related to future developments and current performance. These statements are subject to a number of risks, uncertainties and other important factors, which may cause the actual developments and results to differ materially from the statements made. Sanghi Industries Limited and the management of the company assumes no obligation to update or alter these forward-looking statements, whether as a result of new information or future events or otherwise. I will now hand over the floor to Mr. Bina Engineer from Sanghi Industries for opening remarks, which will followed by interactive Q&A. Thank you, and over to you, ma'am.

Good morning, everyone, and welcome to the Q2 call for performance review. I'll first take you through the number -- volume numbers and the top line. So we have achieved volume of 4,16,000 tonnes, which was higher by about 7% compared to September '20. This consists of about 3,86,000 tonnes of domestic cement sale and around 30,000 tonnes of clinker sale. On the price side, we have seen an improvement of about 15%, 16%, which mainly came from the Gujarat market. And on the whole, the net sales of the company improved by 23% compared to INR 171 crore last year to INR 210 crore in the current quarter. On a half yearly basis, the volume has improved by almost 43%. We have achieved 10,16,000 tonnes compared to 7,13,000 in last half year. This includes about 1 lakh tonne of clinker sale compared to almost negligible clinker sale of about 3,000 tonne last year. In terms of the sales value, we have achieved INR 626 crore of sales in the H1 this year compared to INR 415 crore in H1 last year. So in value terms, we have seen a -- more than 50%, 51% increase in the sale. On the whole, EBITDA margin has been maintained for both the periods. In terms of our sales breakup, we have done about 40% of the blended cement sales and 60% was the OPC sales. In terms of the geographical breakup, during this period due to we had taken maintenance shutdown on our line 1 and on the second line also, we had partial availability. Therefore, there was volume restriction and we have focused only on the home market of Gujarat. Besides, the coastal route were unavailable due to the monsoon across the Western coastal line, and therefore, about 91% sales has come from Gujarat set compared to about 86% in the previous corresponding period. This is in line with the expected seasonal change during monsoon. In terms of various costs, we have more or less maintained the raw material and input cost, while there is higher cost on because of the higher sale of blended cement on the overall basis, we have maintained the input cost at about just the same level. Power/fuel cost has been generally higher at 12% to 14% on a production basis. This is as anticipated because of the higher cost of coal that has been there across the industry and globally. We have used on the whole 22% lignite compared to just about 1% last year. So we have tried to enhance the lignite quantity in our power/fuel usage. However, there is still almost 37% impact on the cost per because of the higher coal cost. In terms of selling and distribution, we have had about INR 51.84 crore, which is comparable to the previous period. The selling and distribution cost of domestic cement sale has been about INR 1,246 compared to INR 1,300 last year. The component of sea route was about 8% and balance 92% was by road. In terms of the stores and consumables, including packing cost, stores and consumable costs has increased by about 27%, 28% during this period. Also, the repair maintenance costs has increased during this quarter, which is captured in other operating expenditure. This is because we had not taken a maintenance program last year due to lockdown situation. And this time, we have taken an extended maintenance program on Line 1. Therefore, there is a higher impact of store space compared to a low base last year. Similarly, the packing cost has increased by almost 35% because of the higher crude oil price and the polypropylene prices, and this has been reflected in the other operating expenditure. In terms of our employee cost, while we are maintaining same as immediately previous quarter, there is an increase compared to last year. This is on account of 2 facts: one is the lower base of last year where senior management had foregone some part of the salary, and therefore, there was lower impact. Besides, this year, on completion of our Line 2 projects, there has been a onetime bonus for the employees, which has been captured in the current quarter. So these are the 2 reasons for higher impact on employee costs compared to last time. Similarly, other operating expenditure last time, we had not incurred the cost -- material costs -- any significant cost on advertising, marketing, traveling, et cetera, because of the lockdown situation. This time, these costs have been normalized, and therefore, there is an increase -- significant increase in the other operating costs. Finance cost is maintained at INR 20.86 crore, which is comparable with the immediately preceding quarter. It is higher compared to the last period because of the issuance of the new NCD. In terms of the EBITDA margin, we have achieved around 20% margin on net income compared to 22% in the previous corresponding period. And we have achieved EBITDA of INR 42.6 crores compared to INR 37.9 crores in the previous corresponding period. As you would have noted, the company is under new tax regime and does have sufficient tax benefit. So it is not required to pay normal tax; however, we have made provision for deferred tax as per the applicable accounting standard. So this is a brief from my side. Alok, if you want to add anything?

No. As of now, I'm okay. We'll take it up in Q&A.

Okay.

[Operator Instructions] First question is from the line of Amit Murarka from Axis Capital.

So my question is on the -- yes, just wanted to check what is the status of the expansion? And when will it be commissioned there?

Yes. Expansion has been completed in totality. And in fact, during this quarter, we have taken almost 50% production from the new line, including the power plant. Cement mills have been running on the need base, depending on how much conversion of cement we are doing. But on clinker side, since we have taken annual maintenance on the Line 1, we have used -- the current volume has come at least 60% from the new line. So the line is completed, and we have continuous production from the Line 2. However, we believe that we have not reached the optimum level, and we are trying to optimize the production process, input/output parameters, et cetera, during the current quarter. And we are hopeful that in next 2 to 3 months, we should be able to achieve the optimum level of input/output ratio along with the consistent production from Line 2.

So broadly, the commissioning -- I mean, the commercial commissioning we think will be on Jan-Feb somewhere?

That is what I'm expecting. Yes.

Okay. And like after this is done, how are you expecting the volume as of to be on the expanded capacity of the business?

So as I mentioned on many previous calls, the idea for the company is to continue to ramp up the volumes. Now that we have sufficient production available from both the clinks, I think in over the next 2 or 3 years, we should be able to hit industry normalized capacity utilization numbers.

Okay. Got it. So the priority will be what, to run line to anyways going ahead? Is this -- I mean, what is the cost essential between Line 2 and Line 1 in terms of operating costs?

It's too early to give the cost differential because the Line 2 has not yet been stabilized, but the fact remains that Line 2, generally because of a newer technology, better systems, will be able to deliver better cost number. That is one. On the second aspect of whether we will sell from Line 1 or Line 2, it is actually agnostic because for us, total production matters. So whether we produce from Line 1 or Line 2, it will always be a blended production which has to be sold in the market. So our priority will be to sell in domestic market and some surplus which we can export and by way of clinker exports, we will continue to do that.

And is there any clinker contracts that you expect to close in the export markets?

We already have some contracts in hand. But however, as you can see that there are energy prices and shipping prices are fluctuating rapidly, and so the buyers are also a little wary of getting into long-term contracts. And similarly for the company, it will not be very advisable for us to lock in large volume at fixed price and if the energy prices start moving up, it will hit our margin. So the idea is to play it quarter-on-quarter and see how the global trade markets and energy markets behave.

And lastly, on fuel mix, like what is the expected fuel mix, lignite was 22%, is it expected to go up? And how do you expect the fuel mix to be, let's say, in Q3 or 6 months later?

So roughly in this range. It all depends on the quality of lignite and the availability of lignite. And at the same time, as you know, lignite is a very difficult fuel to use in the plant. So it will be a combination of this that we have to see and see how we can ramp up lignite consumption. As you can see, we are continuously trying to ramp up lignite consumption because it's the cheaper fuel. But exactly where we'll end up is not known yet.

And just one thing. I missed the sales volume. Could you please share the clinker and the cement sales volumes?

Yes. About 30,000 tonnes was clinker volume and 3,86,000 tonnes was the domestic cement sales. So aggregating to about 4,16,000 tonnes.

And what will be the production?

There won't be any significant change on the closing volumes. So production numbers would be similar.

[Operator Instructions] The next question is from the line of Rajesh Ravi from HDFC Securities.

Yes. First of all, on the clinker production for this quarter, please?

Could you repeat again? I couldn't hear you.

Yes. Please share the clinker production for September quarter and June quarter.

Clinker production has been similar corresponding to the cement sales. So there is not a significant change in the inventory level. So it would be similar.

Would you have the number, please?

I don't have the number readily in front of me.

No issues. I'll take it offline. Secondly, on the trade sales, this quarter, what is the number, share of trade and the total sales volume?

So again, trade sales is roughly in the range of about 35%, which is what we have been maintaining for last many quarters. There isn't major change in this number.

Okay. And third -- another, you said that 16% of the sales volume for the quarter came in from the second line that line, because it is not yet capitalized, how is the accounting statement done for the same line in terms of revenue and cost line items?

Whatever production has been done from the Line 2 has been blended with the production of Line 1 for the final output of cement. So the costing has been done for the same on the basis of benchmark with Line 1, and if there is any excessive cost incurred in Line 2, to that extent, there has been a capitalization as a trial run expense in preoperative expense.

Okay. Okay. No, where I'm coming in from is when you capitalize the plant in March quarter, how would the employee cost number and other expense number look like against INR 17 crore, INR 18 crore quarterly run rate of employee costs we are doing?

So we are not doing any significant capitalization in the employees' cost because these are standard costs for Line 1 or Line 2. It is only some of the power/fuel, which has ratios or parameters, which are still not optimized. So only to that extent, there is a trial run impact on the costing. Otherwise, particularly employee cost is more or less absorbed in this P&L for Line 2 also.

Okay. So this INR 18-odd crore run rate will continue also when you're full commercial operation of the new line, right?

Correct, which -- there would be a very nominal, marginal change in case of any additions, et cetera. But I don't see any major impact now.

Okay. Agreed. And another line item you mentioned, in terms of demand, how are they looking? And the last question is also on the clinker exports, which you had targeted 500,000 for this financial year. Second quarter, there is nothing and first quarter, we have done around 60,000 tonne exports. So what is your thought on that?

So demand continues to remain strong in Gujarat. Western India, we had a little bit of a challenge because of unseasonal rains in September. So the monsoons have got slightly delayed. But nevertheless, the demand has been quite strong. We -- for the entire Q2, Gujarat ended with almost about 13%, 14% higher demand compared to last year. I see October is slightly slow because of the festival season. But I see that even in Q3, we'll start hitting good volume numbers because of strong demand and undercurrent in the market.

Okay. And on the clinker export what were the thoughts against 5 lakh target you have set for this year?

Yes. So clinker export is quite opportunistic trade. We have consistent buyers who are procuring clinkers from us and that continues to grow. We are hoping to hit our numbers. I don't think hitting clinker volume numbers is a big challenge as of this moment. The only caveat which I would like to add is that there are a lot of fluctuations in energy prices and the freight prices. And so even buyers are not willing to do a lot of inventory stocking and are buying more or less on a spot basis. Once I think the energy prices and the freight market starts capitalizing, people will go back to purchasing their regular quantity.

[Operator Instructions] The next question is from the line of [ Karan Chandawalla ] from Samena Capital.

This is [ Karan ] here. I have a couple of questions. The first 1 being, ma'am said that the expansion process is complete. However, we see that the amount has been capitalized under capital work in progress. So is -- has the COD not been achieved? So if that is the reason, then when will the COD be achieved? And the next -- the other question is the reason for such a high level of inventory as on 30th September 2021?

Yes. So far as Line 2 is concerned, I mentioned earlier that we are in the process of optimizing certain input/output ratios, which are still to be achieved at par with the guaranteed performance levels from the suppliers. This plant was commissioned during pandemic period in absence of any presence of the service engineers, et cetera. So we are taking a little prolonged time to achieve the guaranteed performance. Now the suppliers and engineers are able to travel and they are available with us. So that is why we are expecting that in the next 2 to 3 months, we'll be able to optimize the input/output ratios. We have no challenges on achieving the production as such. But the guaranteed input/output ratios are still not achieved and that is what the optimization process is going on. So the second question could you repeat, please?

Second question was regarding the level of inventory. It's a bit .

Yes, you're right. Because in anticipation of the coal hike, we had done a [Technical Difficulty] coal which was...

Sorry to interrupt, this is the operator, the audio is breaking from your line. Please check.

Yes. Is that better?

Yes, ma'am. Thank you.

Yes. Thank you. So we had procured our last coal vessel at the very second of September, which was a Capesize vessel. And fortunately, before the big jump in the coal price occurred, we had procured this vessel. So since this had just arrived that entire coal quantity of next 2 to 3 months' inventory is loaded in the balance sheet as on 30th September.

Okay. Just 1 clarification I wanted regarding the expansion. So there was a 2 million tonnes expansion also planned of standing capacity. So that is also being completed? Just wanted to clarify this.

No. We did mention earlier also that the satellite grinding unit in Surat is put on hold until for next couple of years till we see a better utilization and full optimization of the capacity which is available at Kutch. So that unit has been put on hold.

[Operator Instructions] Next question is from the line of Prateek Kumar from Antique Stockbroking.

My first question is on CapEx. So while we seem to have like completed our CapEx like last year. In first half, we've also incurred like INR 140 crore kind of CapEx. So what is this related to?

So the interest portion and the excessive trial run cost in the nature of particularly on coal and the power consumption has been capitalized. Besides that, there has been also normal CapEx of about INR 24 crore, INR 25 crore, which has been incurred during this quarter. So these are the key factors.

Sorry, the capitalization cost is in CapEx cash flow? What did you say?

I said that the interest portion on the project term loan has been capitalized in addition to the excessive trial run cost incurred on power/fuel, particularly. So both these factors have been capitalized. There's 3 operative expenses or trial run cost. And normal CapEx of about INR 25 crore has also been capitalized, which was for Line 1. So this is normal CapEx, which all companies incur during their maintenance program. So around INR 24 crore, INR 25 crore of normal CapEx was incurred by us because there was no maintenance program last year and that part has also been capitalized. Wherever there was a regular maintenance cost that has been already taken to P&L.

So there's additional INR 100 crore, does that -- is that included in like part of our CapEx of at INR 1,200 crore, INR 1,300 crore number, which was mentioned earlier or that is additional over and above that number?

No, no, it is part and parcel of the overall cost.

Because if you accumulate our previous year's CapEx, that is already like sort of crossed that number of -- which was guided...

Some part of the CWIP is not essentially Line 2, whereas in expenses on terminals or jetty and other parts. So it is not -- that entire number is not reflecting Line 2.

Okay. My second question is on volumes. So with the drop in -- some drop in volumes in this quarter. So what would be your expectation for full year in terms of volumes? I think if you have guided for earlier 2 million tonnes, 2.5 million tonnes earlier -- 2.5 million tonnes, I think you said earlier?

Yes, we stick to that. I think based on demand and how the energy prices behave, we should see a good demand in the market, and I'm quite confident that we'll be able to hit those kind of volume.

And lastly, on coal prices. So while we have increased our lignite content, but have you also started seeing shipments of lower coal prices, international coal prices? Or we are not really seeing that in -- on the ground?

So as I said our last shipment was received at the end of September. Thereafter, in October, we have seen a very significant jump in the coal cost, but we haven't had to buy at that level. On the other hand, we have enhanced our lignite usage also. So we will be -- based on our inventory and lignite availability, we will be making our next purchase. But from the peak of about $230-plus, the coal prices have begun to soften. So we are hopeful that will not have an extreme level of impact, but yes, it is a cost to be watched.

[Operator Instructions] The next question is from the line of Sanjay Nandi from Ratnabali Investment Private Limited.

Hello?

Yes, we can hear you.

Yes. Ma'am, can you please share the volume number for this quarter, I missed out the initial conversation?

Total aggregate volume was 4,16,000, about 30,000 of clinker and 3,86,000 of domestic cement sales.

Okay. And ma'am, just now you mentioned that from the peak price of INR 230 per tonne of coal, it has been softened. Can you please guide something like what is the current level at what this thing has softened?

No. I think what we are saying is also from the similar market sources as you all have access to. So I would not like to make a comment on current levels, but what we understand is definitely they are softening compared to the peak level. So since end of September, we have not tied up further coal price. So I don't think I can put a number to it.

Got it. Got it, ma'am. And what is the pricing scenario as of now? Like did you take any price hike in the first week of this Q3, like in the month of October?

Yes. Prices in Western India are fairly stable. We haven't seen any correction even during Diwali period. So you should expect similar prices to Q2 levels even in Q3. If you see an increase, it will happen in probably December or January.

And sir, what would the debt repayment for the second half of this fiscal?

Sorry. Could you repeat?

Yes. What would be the debt repayment for the second half of this fiscal, ma'am?

The principal outflow is about INR 20 crore to INR 23 crore.

[Operator Instructions] The next question is from the line of [ S. Narayana ], Individual Investor.

I have 2 questions, ma'am. One is what is the capacity utilization of Line 1, Line 2 as on today? And the second is how much you are getting EBITDA per tonne of the sales -- sale of the cement?

Yes. As we speak, in October and November, we are able to achieve around 45% to 50% of utilization of combined lines, both Line 1 and Line 2, so that is around 45% to 50%. And the EBITDA number, of course, is visible from the results, we have done about INR 1,025 on a per tonne basis. This is slightly blended because of the 30,000 tonne of cement mix, but this is fairly indicative.

Okay. Now that demand has picked up very well, do you expect to increase the capacity [Technical Difficulty] ma'am?

Yes, of course. Along with the demand, obviously, we'll be producing more and we would have better utilization.

[Operator Instructions] The next question is from the line of Rajesh Ravi from HDFC Securities.

You mentioned about this coal inventory at [indiscernible] end of September. So approximately what blended cost would that be for you?

That was slightly more than about $100 at that point in time.

Okay. Slightly more than $100. Now compared to any new purchases, would be more than $130, $150, is that understanding right?

Yes, I believe so.

Great. And -- yes, so that should be helpful in the second half. Second, on the project now that it is done and just waiting commercial -- commissioning, could you refresh us what is the total project cost? And how much is the loan associated with it, at what cost?

So the project cost will fluctuate a bit here and there till we do the capitalization because of the operative cost, but the loans associated with that remains static. We have completed our borrowing at about close to INR 700 crores. And that average cost is about 10%, 10.5%.

Okay. So 10%, 10.5%, INR 700 crores for the project. And the total we have spent including interest on the project is total, how much so far there?

So we -- if you remember, we had some parts of the project done much earlier about 7, 8 years back. So that portion is also sitting in my CWIP, until I complete the whole project. And recently, we have spent about INR 1,100-odd crores. So together, that amount plus some CWIP on other aspects, all of this is being reflected in the balance sheet. I don't see that number changing very significantly by the time we actually capitalize.

Correct. Only the interest component would add up to it?

Yes. Some portion would move -- may get added, but otherwise, there won't be any significant jump there because as I said, the lines are already functioning. So there is no expenditure to be carried out on the line except whatever additional upgradation or some minor changes which we may do.

And what is the total thermal power plant capacity we have now?

We had 62-megawatt of first line, 68-megawatt of second line and 13-megawatt of WHRS. So together, we have about 140, 142 megawatts of power capacity, 130 being thermal and balance being WHRS.

Okay. And this 68% was along with the Line 2, right?

Correct. It is part and parcel of the CWIP.

Okay. And WHRS is also part of this project?

No. WHRS is related to Line 1. In Line 2, we have not set up WHRS as yet. We would like to observe the performance of the plant for a while and see how much wastage of heat is actually taking place based on that, we'll take the call.

Okay. Great. And one last question. This delay versus March till next January, is it -- because generally, we don't see such long delay commissioning -- commercial commissioning or plant stabilization. So anything specific related to the manufacturing -- manufacturer-supplier side, whereby the stabilization performance guarantees are not being...

Let me explain it this way that see, when we commissioned, we were still in the middle of the pandemic and all foreign and domestic travel were restricted. So normally for the final stages of implementation, the OEM supplier depot there and service engineers for a period of almost like 1 year of mandate. So almost you have like, say, 8 suppliers putting in people for 2 months and 5 people sitting there. And the entire commissioning process has to be carried out in their presence. Unfortunately for us, because of the severe travel restrictions, this couldn't take place. And we -- our team has commissioned the plant in totality. There were also restrictions on the movement of material, et cetera, everything was lagged out. And therefore, we did face challenges. However, we commissioned, so far as the production is concerned, it is coming out consistently. But we are not satisfied with the performance parameters, like, as you know, we have been the lowest cost producer in the Line 1, and apparently, we expect Line 2 to do better. So we have not seen that level of optimization as yet. That is why the prolong period of whatever this implementation or preoperative or trial.

Ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. Vaibhav Agarwal for closing comments. Thank you, and over to you, sir.

Thank you, Faizan. Ma'am, I had a few questions. Ma'am, in your opening remarks, you mentioned about the realization part. You said that it is a market-driven realization for us. So what I am observing this is the highest -- probably the historical highest realizing product, so everything will be attributed to market only or is it a composition of sales also because has been this number to see historical high? Any comments on that? So everything -- all the 8% sequential growth which has come it is all market-driven? And can we expect this number to sustain because the comment made was that the prices are fairly stable at this point of time? So any comments on that will be helpful.

Yes. See, we have seen that Madhya Pradesh, Maharashtra or Rajasthan have seen a price increase of about only 3% range, whereas Gujarat has seen a price increase of about 15%, 16%. So probably Gujarat was lagging behind in the previous periods, which has been now caught up, and that's why we expect the prices to sustain. And Alok, you can add more color to this?

Yes. I mean, Vaibhav, what you rightly said, Gujarat market is a fairly stable market when it comes to price fluctuation. If you look at even the historical track record, the price volatility in Gujarat market does not happen so frequently. If the prices go up, they continue to remain there, but at the same time, they don't collapse easily. So even during monsoon period, we were able to sustain these prices. Now with increase in input costs, all manufacturers are pushing for better realization to absorb the input prices, and this market is also quite supportive. It was unfortunate that in September, we had delayed monsoon, otherwise, we would have seen a better pricing coming in earlier. But I think in Q3, you will see more, similar to Q2, similar prices. And then Q4 onwards, you should see an improved price realization for the company. Other than the fact that the market driven, as you rightly know that we have been focusing a lot on improving the supply chain efficiencies. We have been putting in a lot of ground practices, which help us curb the impact of sales and distribution costs. And therefore, even if you notice in this quarter, the sales and distribution cost, despite the ramp-up in diesel prices, have remained fairly stable.

Yes. Actually, that was the next question, sir, that you did come at a conference during Q2 and you were quite concerned about transport strikes and multiple factors at that point of time. And despite that, your freight cost and the selling cost in this quarter is not going up, it's actually flattish sequentially. So can you attribute some more color or can you show some numbers, too?

Yes. So I mean we faced a big strike at our plants with very high diesel prices. There was a pressure by the transporters to push higher-than-normal diesel price impact, which we were able to resist. Of course, we had to give some impact of diesel prices, but the ask was much higher, which we were able to absorb. Similarly, because of the better efficiencies within the ongoing practices, despite the fact that we were able to give this increase in trade, we were able to curb it or absorb a lot of that due to the ground practices. So the net impact hasn't been very significant for the company. Fortunately, for us, the Government of India has also reduced excise duty and various state governments have reduced VAT on diesel. And so now in Q3, the freights naturally will come down a little bit more.

So sir, so now coming -- going forward, so is it fair to assume that despite all the cost pressures this industry is facing at large, our profitability because of our efficiencies may not fluctuate a lot and remain at the ?

That is the endeavor. That is the endeavor. As I've reiterated on multiple calls even earlier, the idea is to remain sustainable volumes will be a factor of market cost and prices, again, a factor of market. But from a company's point of view, we want to remain more sustainable when it comes to margin.

Right. Right. Right. Okay. We'll just check it, is there any questions in the queue? No. Thank you, sir. Thank you, ma'am. On behalf of PhillipCapital, I would like to thank the management of Sanghi Industries for the call and also management for -- the participants joining the call. Thank you, Faizan, you may now conclude the call.

Thanks, Faizan, and thanks everyone.

Thank you.

Thank you. Ladies and gentlemen, on behalf of PhillipCapital India Private Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.